Soaring commodity prices and supply bottlenecks have combined with rising demand recently to push up inflation in the emirate's real estate sector. In response, the authorities have stepped in to try and cool prices down.
The situation is being closely watched by banking group HSBC, which recently reported that property prices in Abu Dhabi had risen by some 61% in the first half of 2008. Another report issued recently by investment bank Morgan Stanley stated that residential rents are likely to continue to increase for at least three to four years. The report suggests rents could rise by 30% annually on average until supply meets demand. Other segments should see rent rises for two to three years.
Morgan Stanley said that, given the high and escalating cost of property in Abu Dhabi, many workers will continue to commute to the city from Dubai, just over one hour away by car though traffic can make it up to three hours, and Al Ain, the former summer capital in the emirate's inland region.
The financial company attributed the supply shortage in part to a moratorium on building imposed between 1999 and 2001, which left the emirate with a small housing stock, unprepared for the economic boom of the past five years.
However, other factors are also at play. The emirate's population is increasing quickly, a major demand-pull on prices. This is due to both a fast-growing national citizenry and an influx of expatriates attracted by the dynamic economy and the authorities' push to ensure a broad and skilled labour pool. Demand has also been stimulated by easily available credit and rapidly increasing wages.
On the supply side, high global demand and a degree of speculation have driven up construction material costs. According to an August report by the Abu Dhabi Department of Planning and Economy, steel prices in the emirate leapt by 91% in the first half of the year, while those of cement rose 46%. Ironically, one factor contributing to the rising cost is demand from emirate's own building programme - the government estimates that projects worth $54bn are currently underway. Despite a 24% increase in domestic steel production last year, Abu Dhabi still imports more than 60% of its needs. The dollar-pegged dirham has been weak of late, increasing import costs.
Given these factors, the government expects construction material prices to remain high until at least 2010. This is likely to feed through into higher property prices, given the strength of demand.
In response to these issues, the authorities have taken prompt action. Foreigners who are not nationals of Gulf Cooperation Council (GCC) member states can now own most property on 99 year leases. This move is designed to encourage foreign investment in the construction and real estate sectors, with the effect of boosting supply.
Additionally, in 2007 the authorities introduced a rent increase cap of 7%, which was cut to 5% at the beginning of this year. While the policy is intended to protect tenants from unfair rent hikes, its efficacy is questionable: according to HSBC, rents increased some 22% in the first half. The limitations only apply to those already renting a property, so a landlord can increase rents as much as he wishes if a new tenant is moving in. Furthermore, the cap may encourage some landlords to overprice initial rents in the knowledge that their ability to raise prices at market rates thereafter is curtailed.
While tenants continue to feel the squeeze and some landlords are frustrated by rent capping, the tight property supply has led to a flourishing secondary market, benefitting those who were able to buy property a few months or years ago. According to Morgan Stanley, resale prices in Al Reem Island, The Gate district and Al Raha Beach have already increased by an average of 52% so far this year, with units on Al Reem seeing 75% growth. Given the medium-term supply outlook, profits look set to be generous for the next few years, though tighter limits on property "flipping" (swift resale at inflated prices) should curtail speculation and the emergence of a property bubble.
Over the medium-term, Abu Dhabi's property market will mature as a large number of residential and mixed-use projects come on stream, redressing the emirate's historic supply shortage. Encouraging investment in the sector by easing ownership restrictions and other incentives should help make the supply side more flexible and responsive to demand, lessening future price shocks. In the interim, though, the sudden glut of construction will keep commodity prices high, and rents and sale prices will continue to rise.